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EFSAS Commentary

Worryingly for Islamabad, its deep economic crisis is causing Pakistan-administered Jammu & Kashmir to become restive


Pakistan continues to be in dire financial straits, and is reeling under excessively high external debt and a severe balance of payments crisis. Inflation has risen to a 48-year high, and amidst the desperation of the embattled citizens of the country the government has this week resumed talks with the International Monetary Fund (IMF) for a bailout. Former Pakistan Finance Minister Miftah Ismail has blamed ineffective governance, poor education, and the unsatisfactory law and order situation in the country as being prominent reasons why IMF bailouts had become a recurring phenomenon for Pakistan. Ismail is convinced that the policy of “borrow from Country A to return to Country B” that has been adopted by successive Pakistani dispensations, whether civil, military, or hybrid, “can’t go on”. The Pakistani daily Dawn reported that officials had conceded that about 30% of the country’s population was already below the poverty line and was being looked after through various social sector support programmes, and another 22-25 % was vulnerable to the inflationary spiral and hence needed to be insulated from further shocks. Among those suffering are the people of Pakistan-administered Jammu & Kashmir (J&K). Worryingly for Islamabad, the economic crisis that is crippling Pakistan and the recent harsh decisions and actions of the Pakistani government relating to Pakistan-administered J&K have caused deep disquiet among the people of a region that is contentiously held by Pakistan, and has borne the brunt of decades of discrimination and exploitation.

Pakistan has less than $3.7 billion left in its State Bank, which is enough to cover just three weeks of imports. The lack of foreign exchange reserves and high inflation rates has led to a severe shortage of essential items such as food and medicines. After delaying implementing of the strict conditions laid down by the IMF for months due to fears of a possible public backlash, the Pakistan government led by Prime Minister Shehbaz Sharif, facing the prospect of national bankruptcy, relented. It started to implement some of the conditions proposed by the global financial body prior to the arrival of the IMF delegation led by IMF Pakistan Mission Chief Nathan Porter in Islamabad on Tuesday.

The Pakistan government scrapped subsidies, leading to yet another rise in petroleum and gas prices, which had already risen to record levels. It also loosened controls on the Pakistani Rupee to rein in a rampant black market in dollars, causing the currency to plunge to a record low. The State Bank of Pakistan is no longer issuing Letters of Credit except for essential items such as food and medicines. This has led to a pile up of thousands of shipping containers stuffed with imported items, including vegetables, which are rotting at Karachi port as the Pakistan government has no foreign exchange reserves to clear the required payments and can no longer afford them. Most industries in Pakistan have been severely affected by the imports block and the devaluation of the Pakistani Rupee. The textile industry, one of the mainstays of the Pakistan economy, is going through a severe downturn as textiles factories have partially shut down. To add to these miseries, public construction projects have halted while domestic investment has seen a drastic decline.

It was during former Prime Minister Imran Khan’s tenure that the IMF had agreed a multi-billion-dollar loan package for Pakistan in 2019. The initial $6 billion IMF programme was later expanded to $7 billion. The ninth review of the Extended Fund Facility (EFF) has been pending since October 2022, and kept getting delayed due to Islamabad’s reluctance to implement the lender’s conditions. The talks with IMF on Pakistan’s economic and fiscal policies, as well as much-needed reforms that the global moneylender has been seeking, resumed in Islamabad on 31 January. The technical discussion will continue till 3 February, while the second phase of policy negotiations to finalize a memorandum of economic and financial policies would carry on till 9 February. To avoid default, Pakistan is requesting a crucial installment of $1.2 billion — part of its $7 billion bailout package — from the IMF. Pakistan requires over $8 billion during the remaining five months of its current fiscal year to meet international obligations. The importance of the IMF programme for Pakistan is compounded by the fact that successful negotiations with the IMF would also pave the way for desperately needed cash inflows from other multilateral lenders and friendly countries such as China, Saudi Arabia, and the United Arab Emirates (UAE).

Prior to its delegation’s visit, the IMF made it clear that its mission “will focus on policies to restore domestic and external sustainability, including to strengthen the fiscal position with durable and high quality measures while supporting the vulnerable and those affected by the floods; restore the viability of the power sector and reverse the continued accumulation of circular debt; and reestablish the proper functioning of the FX market, allowing the exchange rate to clear the FX shortage”. The IMF also underlined that “stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook, strengthen Pakistan’s resilience, and obtain financing support from official partners and the markets that is vital for Pakistan’s sustainable development”. Pakistan’s Finance Minister Ishaq Dar, in an official handout distributed after his initial briefing to the visiting IMF delegation, stated that he had “extended all his support to the mission and committed to working together to reach an agreement to complete the ninth review under the Extended Fund Facility (EFF)”. A report in Dawn quoted an official as saying that Pakistan’s “maximum effort with the IMF will be to secure an arrangement that entails burden of massive fiscal adjustment on the principle of ability to pay amid an already hard-pressed majority population”. Further, “this would mean all segments of society, including the middle class, civil administration, armed forces and judiciary, would have to sacrifice the kind of lifestyle that is no more sustainable… The thrust of reforms would be on permanent issues and trim fats almost everywhere and in every institution and their representatives would have to contribute”.

Geo News reported that Shehbaz Sharif had lamented recently that it was really regretful that during the past 75 years, different governments — whether headed by political leadership or military dictators — could not address the economic challenges of Pakistan. Throwing some light on how this bleak situation came about, A. A. H. Soomro, an independent Pakistani economic analyst, opined that incompetent policymakers who catered only to self interest, the culture of political patronage, and incessant dependence on foreign doles were all responsible. Addressing the “pillars of the State”, he continued “Remember, this isn’t the 1980s (US funds for Afghanistan), 2002 (War on terror) and 2015-17 (oil prices crash). We are on our own. No more hand-holding. The hard work begins”.

Maleeha Lodhi,  the former Pakistani Ambassador to the United States (US), the United Kingdom (UK) and the United Nations (UN), in an insightful article titled ‘Failure of economic governance’ reminded that “In a book I put together two decades ago, the late Meekal Ahmed, one of Pakistan’s most distinguished economists, contributed a chapter titled ‘An economic crisis State’. He had this to say then: ‘Economic management in Pakistan has steadily deteriorated to the point where the economy has lurched from one financial crisis to the next. At the heart of the problem has been poor management of public finances and deep-seated unresolved structural issues in the economy that bad management and poor governance has exacerbated. The consequences are plain to see: macroeconomic instability, high inflation, poor public services, criminal neglect of the social sectors, widespread corruption, crippling power outages, growing unemployment, deepening poverty and a deteriorating debt profile'. Meekal also wrote, ‘An IMF programme gets some reforms implemented as part of its conditionality but as soon as the programme is over or ended by the authorities’ themselves mid-way, all the reforms are rolled back’”. Lodhi observed that “Twenty-three years later nothing has changed. This paragraph could well have been written today. Its summary of the outcome of poor economic governance is an apt description of the present economic disarray. For many decades successive governments, civilian and military, with few exceptions, pursued similar policies that contributed to or reinforced Pakistan’s structural economic problems. In fact, their foreign policy and economic management intersected to produce an outcome in which the country became increasingly dependent on external financial assistance, aid and borrowing rather than finding a viable development path by relying on itself and safeguarding its economic sovereignty”.

Pointing out the absurdity of the situation where securing loans from friendly countries and international financial institutions was now being celebrated by government officials and being viewed by sections of the media as major policy successes, Lodhi asserted that living off other people’s money could hardly be termed a national achievement. Another important point she made was that in earlier decades, Pakistan’s Cold War alliance with the West had enabled it to finance deficits with soft loans. In recent years, reliance on the West has been replaced by dependence on close strategic ally China, Saudi Arabia and the Gulf States. This underlined the intersection of foreign alignments and financial help to overcome economic crises.

Lodhi concluded that “The habit of depending on others has become so deeply entrenched in the country’s political culture that there is little if any questioning of this among those in power or for that matter in the establishment whose leaders join in and often spearhead the effort to seek ‘lifeline’ funds from friendly countries. This reflects the failure of economic governance as it involves lurching from one crisis to another with no ability to avert the next one with outsiders seen as stopgap answers to the cash-strapped country’s perennial economic problems. Above all this approach reduces the country to the unfortunate status of a supplicant whose economic survival depends not on itself but on others”.

If the callousness of the Pakistani leadership, civil and military alike, has meant that they have cared little for Pakistan’s struggling people, they have bothered even less for the people of Pakistan-administered J&K. The people of the region, who have often felt discriminated against by Pakistan, have been agitating on the streets since December 2022, braving freezing temperatures to highlight their difficulties and demand solutions. Local traders and members of regional political and social organizations had observed a shutters’-down strike, with markets closed and vehicles off the roads, on 28 December in different parts of Gilgit-Baltistan. Protest demonstrations were held in Skardu, Gilgit, Hunza and Ghizer. Their protests were aimed against Pakistan’s misuse of the ‘Khalsa Sarkar’ law for land-grabbing in the region, the imposition of unfair taxes, the removal of subsidies, and the wheat and power crisis that the region was facing. The ‘Khalsa Sarkar’ law allows the federal government to claim “ownership of barren or uncultivated land” in Gilgit-Baltistan, even if it was collectively owned for long by the local community. According to a fact-finding report of the Human Rights Commission of Pakistan last year, the ‘Khalsa Sarkar’ system violated international human rights standards, including the UN Declaration of the Rights of Indigenous Peoples that protects indigenous peoples’ rights to their collective bio-cultural heritage – their traditional knowledge and resources, territories, and cultural and spiritual values and customary laws – as a whole.

On the protests, the local Pamir Times tweeted on 30 December, “Massive protest demonstrations held in different parts of #Gilgit-#Baltistan yesterday against the ‘Khalsa Sarkar’ colonial law, imposition of taxes and the wheat and power crisis”. The protests continued on subsequent days and reached a scale where the Chief Minister of the region, Khalid Khurshid, felt it prudent to meet with the protesters in mid-January and assure them that he would try to resolve the matter within a month.

The protests have spread to vast areas of Pakistan-administered J&K. People from all walks of life in several parts of the region have been blocking highways and burning tyres to express their resentment against the government. In places like Bagh, the demonstrators even blocked the main highway, the GT Road. Pakistan is facing its worst-ever flour crisis, and the effects are being felt acutely in Pakistan-administered J&K too. Amid all-round shortages, including of food and medicines, being faced by the people in this remote, neglected region, the scarcity and the increasing prices of the daily staple, wheat, is being felt the most. Another major grievance is that electricity shortage is leading to load shedding and outages for hours on end. People in Muzaffarabad took to the streets to protest against the increasing load-shedding hours. The outages, and the removal of the subsidy on electricity for Pakistan-administered J&K, which is blessed with vast water resources, have been particularly sore points with the people of the region. The total electricity requirement of Pakistan-administered J&K is 350MW, but it produces more than 4000MW of electricity. The rest goes to Pakistan. Reports in the Pakistani vernacular media claimed that the order removing the subsidy on electricity was not only a one-sided one, but was also a violation of the Water & Power Development Authority (WAPDA) agreement between the Pakistani and Pakistan-administered J&K governments. Above all, it was the neglect and the marginalization of the people of the region by Islamabad that was fuelling the protests in Pakistan-administered J&K, which were threatening to intensify in the coming weeks and months. For a beleaguered Pakistan, this has become yet another cause for serious worry.

At this uncertain juncture for Pakistan, the question that arises is – where is the country headed? Faisal Siddiqi, a Pakistani lawyer, attempted to answer this question in his 28 January article in Dawn titled ‘Future of Pakistan’. He postulated, “The most likely scenario is that we are entering a period of continuous severe economic crises and political chaos with unending game-of-thrones battles between the PTI and other political parties, ever-increasing terrorism by Baloch separatist and religiously motivated extremists, international and regional semi-isolation, an extraordinarily corrupt and inefficient State, and collapsing societal institutions in the face of unchecked population explosion and unregulated urbanisation — while our human development indicators get progressively even worse”.

Faisal Siddiqi’s conclusion was direct and ominous – “Pakistan is imploding, and its future is not breakup or collapse but more violence and chaos”.